Savings Accounts

 A savings account is considered high-yield if it pays more than a financial institution’s regular demand deposit or passbook savings accounts.  High yield savings accounts are typically money market savings accounts that are limited to six withdrawal transactions per month.

Interest earned on savings accounts is reported to the IRS by commercial banks and other financial institutions and therefore is subject to federal income tax as regular income. Interest is reported on Form 1099 to bank customers, typically in January each year for the previous tax year.

Both savings accounts and Roth IRAs are funded with after-tax dollars by individual investors. However, unlike savings accounts, any capital appreciation earned with a Roth IRA is not subject to federal income tax. Growth in savings accounts, in the form of interest, is subject to taxation.

Simple interest for a savings account is calculated by multiplying the account balance by the stated interest rate and then multiplying by the time period the money is in the account. Interest = Principal amount X Interest Rate X Time Period.

 A savings account is different from a checking account in that it is meant for accumulation of funds and earning interest rather than being a transaction account accessible with checks and debit cards. Savings accounts can be freely accessed by the account holder through deposits and withdrawals on demand and generally pay higher interest than checking accounts but are not designed for payment transactions.